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Analysts: Possible Upside for Industry

Retail stocks might be down, but Wall Street is not counting them out.

Retail stocks might be down, but Wall Street is not counting them out.

While analysts say retail stocks are echoing larger market declines based on macroeconomic factors, industry watchers note that retail stocks have been particularly hard hit as overall market concerns center on consumers’ ability to spend.

“The whole space has gotten destroyed for the most part,” said B. Riley & Co. analyst Jeff Van Sinderen. “There’s been a general concern about the consumer and that’s reflected in this space and in these stocks.”

Needham & Co. analyst Christine Chen said many retail stock valuations have bloated this year due to buyout speculation. “You’ve seen lots of these names being propped up by the potential private equity premium and now a lot of them have started to pull back,” Chen said.

At the same time, Chen said typical seasonal doldrums are adding to the valuation lull as consumers sat out the highly promotional summer months while waiting for the back-to-school season. Chen said retailers typically earn roughly 70 percent of income in the year’s back half.

“You see this happen every year going into summer — but there has been moderate growth,” said Chen.

The back-to-school season could lend a boost to teen retail stocks as analysts observed that, historically, the teen sector is more immune to macro concerns. “That demographic has a very high disposable income given as a percentage of their income,” Van Sinderen said. “They don’t have rent, mortgages — and they can spend pretty much what they make.”

But that’s only if retailers can deliver wear-now, trend-right merchandise to drive mall traffic, which has been less than stellar this year so far.

“Its so apparent when you are in an ‘A’ mall — its busy; when you go into a ‘B’ mall — its empty,” Chen said. “Its night and day.”

CIBC World Markets analyst Dorothy Lakner sees possibilities for luxury and high-end retailers as more affluent consumers feel less pressure on spending than their less affluent counterparts. Lakner noted retailers such as Nordstrom Inc., Tiffany & Co. and True Religion Apparel Inc. are weathering this period well.

Nonetheless, Nollenberger Capital Partners analyst Ann Poole expects retail stocks to remain volatile as companies struggle to operate leaner inventory, margins and expenses while consumers balance with rising gas and housing prices.

“I’m not throwing in the towel at this point that the consumer isn’t buying,” Poole said. “Now expectations are so low and everyone’s so freaked out that any positive themes will help these [stocks] bounce back.”

Lakner expects investors to be more selective in picking stocks.

“I think there is much more of a bent toward picking your shots rather than wanting to own the whole group,” said Lakner, who suggests sticking with high-quality companies. “There is still solid sales growth and margin opportunities, and those are the companies we would go after.”

Van Sinderen agreed: “I think we’re entering a period of opportunity for investors in retail stocks — that’s how I would sum it up.”